Best practices, updated every Wednesday

4 posts from June 2013

June 26, 2013

“Legal project management (LPM) has become absolutely
critical to remain competitive in today’s marketplace,” according Christopher
Kelly, Deputy Chair of the Corporate Practice at Loeb & Loeb,
a firm with more than 300 lawyers in Los Angeles, New York, Chicago, Nashville,
Washington, DC, Beijing and Hong Kong. “It saves money, creates budget certainty,
and makes clients more comfortable when they see exactly what their legal team
is doing to become more efficient.”

Kelly recently participated in a pilot test of LPM coaching
with LegalBizDev’s Michelle Stein.
He focused primarily on developing spreadsheets for planning and
budgeting new matters and started by developing a “Corporate Sell Matter”
template which broke down a typical matter into component tasks such as term sheet,
due diligence, purchase agreement and ancillary agreements. Each of these was further divided into sub-tasks,
which were listed in the rows of the spreadsheet. To develop a cost estimate, a lawyer could
work with a dedicated business manager and fill in columns listing the
timekeepers assigned to each sub-task, the estimated number of hours, the
standard rate for each timekeeper, and a proposed budget for this deal. This process enables lawyers to experiment
with different staffing scenarios to find the best solution to each client’s
needs.

Just as importantly, the spreadsheet facilitates the process
of defining the scope of the transaction by requiring the attorney to list the
assumptions on which these estimates were based.

Working on this list of assumptions and carve-outs in the
coaching, according to Kelly, “helped me think through the process of how to be
both concise and precise with a client at the beginning of each matter.” Coming up with the best list for a particular
matter requires significant communication between client and firm, and enables
both sides to talk through what work is required, and what is not. On hourly deals, this leads to a new mutual
understanding and rapport that increases the likelihood of new business in the
future. And on fixed fees, it leads to
much more accurate bids, and increases the likelihood of completing high
quality work within the original budget.

Of course the best plan in the world is only as good as its
execution, and Loeb & Loeb also recently purchased the software program Engage to help develop initial budgets and then
track spending against them. The
Corporate Practice is in the process of building a database of actual
experience in past and present deals to increase the accuracy of future
estimates. In fact, a few days before I
interviewed Chris, he had just won some new business based on an estimate that
grew out of this approach.

After Chris developed the Corporate Sell Matter template, he
worked with his team to develop several others including templates for buy-side
matters, fund formation and joint ventures.

Several other lawyers participated in the pilot test
coaching program, including Ken Florin, co-chair of the firm’s Advanced
Media and Technology Practice. When
Florin worked with coach Charles Gilliam, they spent much of their time
focusing on improving client communication to better define the scope at the
beginning of a complex international matter that included working with outside
counsel from a number of countries.

Florin had volunteered for the program in part because his
clients are “increasingly asking for alternatives to hourly billing,” and
successful alternative fees require both the firm and the client to do more
upfront planning. “We needed to spend
more time with the client jointly thinking through the stages of the project,
and how to handle aspects which could increase or decrease the cost.”

Many lawyers base their fee estimates on past matters that
seem similar, too quickly assuming the price will be about the same. But by digging into the details of a
particular matter in advance, they can often identify both opportunities for
savings, and risk factors that must be controlled to prevent budget overruns.

The LPM process “led to significantly more communication
with the client” at the outset, Florin said, and as a result “the original project
morphed into something different.” He threw
away his first proposal, wrote a new one, and got the deal.

Florin said that the general approach he applied in this
project will be quite useful going forward:
“The basic rules of how you detail the scope based on back and forth
communication, and drive towards a fee arrangement that is very clear and
transparent will translate well to future projects.”

“The legal business is changing,” he concluded, and the
increasing use of non-hourly fees is leading to “more of a partnership with
clients about how we price matters and how we do our work.”

David Schaefer, Deputy Chair of Loeb & Loeb, said “LPM
is a strategic initiative of the firm in that being efficient, transparent and
accountable builds a reputation for delivering value that is essential to
building and expanding long-term relationships.” Loeb & Loeb, he
continued, “has plans to extend LPM throughout the firm by building on the
success of this coaching and other initiatives.”

June 19, 2013

The 2013 Law Firms in Transition Survey also showed signs of a stubborn underlying optimism that things are
getting better, at a time when the objective evidence says otherwise. For example, when the survey asked “Do you
expect your firm’s effective (realized) rate for 2013 to be up or down?” 67%
said up, 9% said down and 24% predicted no change. Of course we will have to wait to find out
what actually happens by the end of this year, but we do know that in the past
the managing partners and chairs who participated in this survey have been
wrong on this question every time this survey has previously been conducted.

In each of the preceding four
years, the majority of participants (ranging from 59% to 72%) have predicted
realization would go up. However,
according to the 2013 Report on the State of the Legal Market from
Georgetown Law and Thomson Reuters, in each of those years realization actually
“continued to decline, reaching historic lows” (p. 5), currently 83.6%.

Law firm leaders also seem stubbornly fixated on yesterday’s
tactics. 89% said they plan to pursue
growth by acquiring laterals, making this the number one approach to
growth. But according to the Hildebrandt
Citi Private Bank 2013 Client Advisory (p. 11), “Many firms have been
disappointed with their lateral return on investment.” In that study, 40% rated their laterals as either
break-even or downright unsuccessful.

More importantly, focusing on laterals feels completely out of
synch with the way that the marketplace is changing. In Altman Weil’s most recent Chief Legal
Officer Survey, the top three things clients would “most like to see from
your outside counsel” were greater cost reduction (59%), more efficient project
management (53%) and non-hourly based pricing structures (53%). Senior management should be spending its time
trying to deliver what clients want, not engaging in bidding wars for
rainmakers whose business may or may not follow them to their new firms.

What are law firms doing to respond to client demands? According to the Law Firms in Transition Survey,
their “primary response to pricing pressure appears to be discounts.” When “we
asked leaders what percentage of their firm’s fees came from discounted rates,
the median response was 21% to 30% of fees in all firms and 31% to 40% of fees
in firms with 250 or more lawyers.” (p. iv)

And the most widely accepted change to the business model has
been to reduce overhead, as many a laid off law firm former employee can tell
you. 65% of firms have already changed
their approach to managing overhead, and another 30% are currently considering
it.

Both of these changes may be necessary, but as primary
strategies they are misguided in several ways. Discounting does
more damage than cost cutting can easily repair. A 1% reduction in revenue requires more than
a 1% reduction in costs because it affects partner profits as well as
overhead. The exact multipliers depend
on a number of variables, as explained in my book Legal Project Management,
Pricing, and Alternative Fee Arrangements.
For an example of how the math works for one small firm see the post Discounting,
realization, profitability, and legal project management, Part 3in this blog. In that case every
one percent loss in revenue due to discounting led to a 3% loss in partner
profits, while each one percent reduction in costs led to recovering only 2% of
partner profits.

Well if laterals are not the answer, and cutting overhead is
not the answer, what should law firm leaders be doing? There are no silver bullets or magic
solutions, but they would do well to start by putting more of their time into listening
to clients, and giving them what they want. Success in any business is based on
only one thing: meeting client needs in
a sustainable way. In the current
environment, that will require many firms to focus on legal project management. To address pricing pressure, for example,
firm leaders should be thinking not about cheaper discounted hours but rather learning
how to meet client needs at the same quality with fewer more efficient hours

As Tom Clay summed up the survey:

Law firms need to cultivate the
opportunities in today’s changing legal market, rather than hunkering down
against the threats. This is a difficult lesson for an inherently cautious
profession, but it must be learned.

We
are especially fans
of their Law Firms in Transition surveys, which since 2009 have tracked how
managing partners and chairmen view the forces of change, and what they are
doing about it. The 2013 Law Firms in Transition survey,
published a few weeks ago, summarized the opinions of managing partners and
chairs from 238 firms, including more than a third of the AmLaw 200.

This year’s survey found that law
firm leaders are more aware than ever before that the legal market is changing
permanently, including greater pricing pressure, shrinking demand, growing commoditization
and an increasing pace of change. As
survey author Tom Clay summed it up, the belief in these trends shows an:

ongoing evolution of thinking… including some dramatic shifts in opinion since
2009. However, there is less evidence of tangible changes in how law firms
operate.

My favorite question in the survey
asked “Which of the following legal market trends do you think are temporary
and which will be permanent?” 14 trends
were listed including more contract lawyers, fewer support staff, more
non-hourly billing and increased competition from non-traditional service
providers. Two answers were tied for the
top, with 96% of respondents saying they were permanent: A focus on greater practice efficiency and
more price competition.

What are law firms doing about
these permanent changes in the marketplace?
Not enough.

When a follow-up question asked
“Has your firm significantly changed its strategic approach to the efficiency
of legal service delivery?” only 45% said yes.
The response to a similar question about pricing was even weaker: only 29% said they had changed their
strategic approach. (Both numbers are
likely to go up, since 33% said they are currently considering changes in
efficiency, and 17% said they are considering changes about pricing strategy.)

More generally, law firm leaders were
asked: “What will be your firm’s
greatest challenge in the next 24 months?”
The top three answers were old school:
increasing revenue (15%), new business (15%) and growth (12%). All three would have made a lot of sense as
the primary focus of leadership in 2005, 2006 or 2007, when the legal market was
growing. But if Bruce MacEwen is
correct in his book Growth is Dead,most leaders who consider them the greatest challenge in the next 24 months
should be thinking less about how to get bigger, and more about client needs.

The fourth challenge they listed –
profitability – is better than the first three, since it reflects a new focus
on differentiating between clients in an important way that law firms have
traditionally ignored.

But, as Clay noted:

[The top] four are internally-focused,
tactical issues with the primary purpose of protecting the status quo in law
firms… It is striking (and disturbing) that delivering value to clients appears
only at number eight on the list, mentioned by just 5.6% of law firm leaders.
Improving efficiency is eleventh on the list of twelve challenges, cited by
only 2.8% of respondents. Law firms that
do not put client needs at the top of their priority lists misunderstand what
is driving the forces of change in the legal market in 2013. If firms would
focus their considerable resources on truly understanding and aligning
themselves with each client’s interests, they would be much more likely to
achieve their financial goals.

June 05, 2013

You won’t get a second chance to make a
first impression, and if the first legal project management program for your
group is not well designed and executed, it may be quite some time before there
is a second one.